KNOXVILLE, Tenn. -- A federal appeals court on Tuesday rejected a lawsuit by 22 cigarette wholesalers claiming that R.J. Reynolds Co.'s discount pricing program was discriminatory.
The 6th U.S. Circuit Court of Appeals in Cincinnati affirmed a summary judgment in favor of the North Carolina-based tobacco company issued in 2005 by U.S. District Judge J. Ronnie Greer in Greeneville. Defendant's program is designed to promote its financial welfare at the expense of the wholesalers, the appeals court wrote, according to a report from the Associated Press. [image-nocss] Perhaps it is unfair, but it is not illegal.
RJR officials said they are pleased with the ruling. Previously, the court upheld R.J. Reynolds' right to choose its own distributors, and today it confirmed the legality of our program, which rewards distributors for selling more of our brands, Robert Stowe, Reynolds senior vice president of trade marketing, said in a company statement.
Smith Wholesale Co. Inc. of Johnson City, Tenn., and the other wholesalers claimed they experienced millions of dollars in lost profits when Reynolds instituted a discount program in 2000 to boost sales of its so-called second-tier nonpremium savings brands of cigarettes, according to the report.
Reynolds offered discounts and rebates to wholesalers selling the highest volume of Reynolds products. The plaintiffs, mostly smaller distributors in the Southeast, said that put them at a disadvantage because they had to cater to consumers demanding even cheaper cigarettes sold by other manufacturers.
Plaintiffs allege that the [program] disfavors them because, unlike RJR's other distributors, they operate largely in rural low-end' segments of the market where their retail customers demand fourth-tier brands, and RJR does not price any of its brands at the fourth-tier price level, the court wrote.
The plaintiffs said that meant they had to pay substantially more than their own competitors for the same RJR products, losing out on discounts ranging from as much as $1.12 a carton in 2003 to 74 cents a carton today.
The appeals court said in a 24-page opinion that even if the plaintiffs' allegations were found to be true, we nonetheless conclude that summary judgment is warranted.
The three-judge panel concluded that Reynolds' market-share discount program was offered to all wholesalers using a non-discriminatory formula. It was therefore functionally available to all wholesalers not only in theory, but in fact.
The plaintiffs' ability to qualify for the discounts was a matter of marketing strategy and brand prioritization, the court wrote. Since price discrimination has not been established, the judges said, plaintiffs' claim therefore fails as a matter of law.
Antitrust experts generally recommend market-share-based discount programs like R.J. Reynolds' because they are size-blind,' Darryl Marsh, Reynolds' senior counsel, said in the RJR statement. This appellate ruling confirms that view.
The judges said the strategy might ultimately cull the number of RJR's distributors, but the law does not require a supplier to ensure the success of its customers. Whether this potential loss of participating wholesalers will ultimately benefit defendant remains to be seen.
The plaintiffs had sought unspecified damages in the suit.
Winston-Salem, N.C.-based R.J. Reynolds Tobacco Co., an indirect subsidiary of Reynolds American Inc., is the second-largest tobacco company in the United States, manufacturing about one of every three cigarettes sold in the country.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.